We have written before about the astounding amount of corporate debt defaults expected in the near term in China, which threatens the economic growth in the Middle Kingdom that is needed to keep the population happy and prevent civil unrest.

Well now, the other shoe is starting to drop.

The Financial Times reports that the housing market in China is tanking. Home prices recently fell for the third straight month, the most since records began in 2006. This housing market decline directly threatens a nascent economic recovery that is badly needed not just for China but for global growth. Default pressure is growing not just on the corporate sector but in the lower tier housing area as well.

China is in a major catch 22. Corruption is rampant; and bad incentives for investment abound, leading to improper allocation of capital. The only way China can maintain the growth economic rate needed is to prop up the credit market by loosening standards or lowering rates. However, this just digs the default hole bigger and kicks the needed credit correction down the road.

The bottom line is that there are red flags all over the place in the Chinese economy. This will not end well.

Europe is still struggling to recover from the housing crisis. The Russian sanctions threaten major damage to European markets and could tip the balance into an economic contraction. Russia itself is most likely in recession, and things will get worse there as oil prices fall. Latin America is stagnant with Argentina defaulting, and now China is having major problems. America seems to be the only country where growth is steady, feeble as it is.

If China sinks into a major recession, this will impact the world economically. There could also be serious political ramifications that could reverberate around the globe. More to come on this situation.